When Nimbys lose, families gain new homes

When Nimbys lose their emotional fights to block new development, new families move into the neighborhood and enjoy new houses that otherwise would not have been built.

Real estate development provides homes, offices, shops, features of the built environment that define the quality of everyday life. Without the changes to the land required by our built environment, we would still be living in caves trying to subsist off the land like our stone-age ancestors.

However, too much of a good thing can be as bad as too little of it. When real estate development is done poorly, or when every last trace of the natural environment is eliminated in favor of the built environment, quality of life suffers. There is a middle ground where land development preserves natural features while providing high-quality homes, offices, and retail outlets.

Unfortunately, when land developers propose new projects, they are generally only as sensitive to the environment as the political process forces them to be. If left to their own scruples, land developers will maximize profit at the expense of everything else, including any natural or cultural features existing prior to development. People concerned about the natural environment play an important role in our land development process.

However, in California and in many other states, environmentalists go too far. They oppose all development because they believe their neighborhood was perfect when they moved in, but new development removes beautiful natural features, clogs the roads with more traffic, and changes the character of the community they moved into. In short, they become Nimbys, people who want no new development in their back yard.

True Nimbys don’t evaluate the pluses and minuses of new development and form an opinion based on facts. True Nimbys oppose everything, and in doing so, they fail to see the hypocrisy in their attitude and actions. After all, they wouldn’t be a resident in their own neighborhood if previous Nimbys had successfully defeated the project where they live.

The cartoon above is one of my favorites because it points to a simple truth that Nimbys conveniently ignore: The neighborhood they live in was better before their house was built and they moved in. The passage of time between when their house was built and a new house in their neighborhood doesn’t matter.

True Nimbys who argue against all new development fail to recognize that the house they live in or the stores they shop in represented the diminution of the quality of life to the true Nimbys that came before them. I wonder how many of them would go back in time and oppose the development where they live? And how many of them are willing to demolish their homes and allow the lot go feral?

Dana Point Nimbys

True Nimbys are easy to find here in California. A group of Nimbys called Save Dana Point is working to oppose all new development. They even want to roll back the positive changes they’ve made to their downtown over the last decade. A group of more rational Dana Point residents opposes them, but fighting emotional Nimbys takes more energy than most rational people have.

Aldo Leopold

Since I am pro development, many people who haven’t read my personal writings find it surprising that I grew up in a rural area without much of a built environment. One of my minors as an undergraduate was Resource Management, where I was exposed to the writings of Aldo Leopold, one of the earliest environmental activists who wrote A Sand County Almanac, a classic inspired by the area where I grew up.

Most modern environmentalists who know of Aldo Leopold don’t realize that he wasn’t opposed to all development of human habitat. He recognized the two extremes, and in his era the political pendulum swung too far in favor of pure capitalist land developers. He fought to restore the middle ground, not to preserve everything as it was.

[I]f in a city we had six vacant lots available to the youngsters of a certain neighborhood for playing ball, it might be “development” to build houses on the first, and the second, and the third, and the fourth, and even the fifth, but when we build houses on the last one, we forget what houses are for. The sixth house would not be development at all, but rather it would be mere short-sighted stupidity. “Development” is like Shakespeare’s virtue, “which grown into a pleurisy, dies of its own too-much.”

Notice that he had no problem with the development and construction of new houses — as long as developers didn’t go too far.

He also articulated one of the most common arguments put forward by true Nimbys today:

In objection to the dedication of the Gila as a permanent wilderness hunting ground, it has been truly said that a part of the area which would be “locked up” bears valuable stands of timber. I admit that this is true. Likewise, might our sixth lot be a corner lot, and hence very valuable for a grocery store or a filling station. I still insist it is the last lot for a needed playground, and this being the case, I am not interested in grocery stores or filling stations, of which we have a fair to middling supply elsewhere.

I recently watched the residents of Carlsbad, California, vote down a new mall adjacent to the existing outlet mall. The project would have preserved 200 acres currently zoned for offices. One of the main (specious) arguments they put forth was that there was already plenty of shopping opportunities available, so this new mall wasn’t needed. It was true Nimbyism using Leopold’s argument to defeat a project that would have preserved an extra 200 acres of land. I doubt Mr. Leopold would have appreciated that.

Terri Pendergast used to enjoy walking her dog in the woods behind her house every day. She’d take a meandering path through the timber, her childhood stomping grounds, to trails leading to the Musquapsink Brook.

For Pendergast, it was a quiet sanctuary she shared with the deer, owls and other animals that made these woods their home. The woods butted up to the back of about 15 homes on Ell Road, turning yards into country oases just 25 miles from New York City.

But in June, those woods were suddenly gone, replaced by a 12-acre bald patch crisscrossed with muddy tire tracks to make way for a housing development.

Pendergast moved back to her childhood home on Ell Road in 2001. The year after she returned, however, a developer applied to subdivide the wooded parcel, a former fruit orchard, and build single-family homes.

Let’s strip away the emotional baggage and examine the facts above:

First, this woman grew up trespassing on a neighboring property.

She didn’t own it.

She has no claim to it.

And only through the kindness of the real owners was she allowed to wander around their land and enjoy its natural features.

We are not talking about a public park, government land, or land with unique environmental features like wetlands or endangered plants and animals. This was an upland woodlot in private ownership.

That sparked a years-long fight between neighbors of the proposed development and the developer, Caliber Builders.

On what grounds do these neighbors have to oppose a private owner wanting to make improvements on private land? Did their years of trespassing give them squatter’s rights?

The dispute reached a resolution after 14 years in June, when Caliber began tearing down the woods behind Pendergast’s house. It took only a few weeks to decimate.

I think he means to say it only took a few weeks to clear the debris from the site future families will call home.

So we should stop land development because some trespassers might have hurt feelings? If we stopped activities normal to the real estate market because someone’s feelings might get hurt, we would stop all foreclosures and evictions too. (See: Should evictions be banned to stop hurting people’s feelings?)

As a side note, I empathize with her to a point. I was the manager on site during the construction of a subdivision where we had to remove several large oak trees. I had to turn my head away when the bulldozers pushed these over. However, I felt good about the new homes I was building on the site, so I quickly got over my angst about losing the trees.

… the planning board approved Caliber’s application on Jan. 29, 2008.

Despite that, Caliber would not break ground for another eight years, after the Northgate Condominium Association sued the Hillsdale Planning Board. …

Environmentalists know that they can kill many projects just by dragging them out, so filing lawsuits that they know they will ultimately lose is still a viable path to victory for them.

And everyone overlooks the fact that these neighbors could have easily solved this problem: they could have banded together and bought the land from the homebuilder and preserved it themselves. Once it was their private property, they could have preserved it or developed it as they wished. Apparently, it’s cheaper to sue someone to steal their property rights than it is to buy the property and secure these rights for themselves.

The court fight traveled all the way up to the state Supreme Court, which ruled against Northgate in 2013. While Northgate continued to fight the development at the local level, the borough allowed Caliber to build in June. …

“It was a very sorrowful outcome for anybody who cares about the local places,” Charkey said. …

And it was a joyous outcome for anyone who cares about the quality of life of the new families who will move into the neighborhood.

Luciano Trujillo, a neighbor of Pendergast’s is more accepting of the outcome.

“In the beginning I wanted to keep the woods, but once the builder got his approval, what are you gonna do?” he said.

Kudos to Mr. Trujillo for admitting the truth. This entire lawsuit was initiated because a group of people wanted to enjoy a benefit provided on a neighbor’s property — at this neighbor’s expense.

It wouldn’t be any different for Ms. Pendergast to propose tearing down her neighbors house to plant trees on it to improve her property value.

Pendergast said she would move if not for her job.”I want to move out of the state,” she said. “I’d like to go somewhere that has more concern for the environment.”

Ms. Pendergast, come out here to California. Nimbys will embrace you with open arms — as long as we don’t have to build a new house to accommodate you: The people in California who think and act like you do would oppose that.

42 responses to “When Nimbys lose, families gain new homes”

Nimbys win a huge victory in California

SACRAMENTO — A proposal by Gov. Jerry Brown to speed up the development of housing that includes affordable units is dead after failing to garner enough support from the Legislature.

Assembly Speaker Anthony Rendon, D-Paramount (Los Angeles County), said Thursday that Brown’s unpopular proposal won’t be addressed before the Legislature wraps up its business Aug. 31.

Brown wanted legislation that would alow housing developments with affordable units to move more quickly through the permitting process, largely by bypassing the typically lengthy California Environmental Quality Act reviews — but only if the projects were consistent with local zoning. Lawmakers referred to the proposal as the “by-right” plan.

In exchange for the legislation, Brown had agreed to include $400 million in the 2016-17 budget for affordable housing, which Assembly Democrats wanted. But that money would not be released without the by-right legislation. Negotiations over the language began to fall apart this month.

Labor and environmental groups walked away from negotiations with Brown last week.

Rendon’s office told The Chronicle that the “speaker believes there will be no further negotiations on the by-right housing proposal.”

That caused immediate rebuke from housing advocates, who had hoped lawmakers would persuade Brown to untie the development issue from the affordable housing money.

“When vital programs that provide housing for vulnerable Californians are on the table, we count on having leaders in our corner,” said Ray Pearl, executive director of the California Housing Consortium.

“The time to invest $400 million in affordable housing is now; we can’t wait for the housing crisis to drive more Californians into poverty.”

Nothing better demonstrates lack of faith in the future than low fertility rates. Increasingly childless Americans and native French simply are overwhelmed by more family-centric Latinos, Africans and Arabs. The native white proportion of the population dropped, except among the ranks of the aged.

In “The Family Mandible” working for the care of seniors, or “boomerpoops,” as they are called, is the major source of income for both younger people and even the déclassé middle aged. Generational politics, with the seniors voting in far larger numbers, results in their receiving ample benefits while more leeway is given to minorities, and immigrants, including the undocumented, who serve them. Everyone benefits, except for middle class families, and the future.

In Mandible, young people don’t have families because there’s no way to afford it. “We’re all at a standstill,” a young person laments in 2047. “There’s no trajectory. None of us will be flush enough to have kids.”

This trajectory may already be evident among today’s millennials. Birth rates have been dropping to historic lows, as young people cannot afford to buy or rent housing appropriate for raising children. Ironically, notes demographer Sami Karam, this makes the country even more dependent on immigration, if for nothing else to empty bedpans for the elderly.

With zero migration, as some nativists and greens may prefer, the U.S. will be headed to the reality already experienced in Japan, and will soon afflict Germany, Italy and also much of East Asia, particularly China. By 2047, according to Shriver, Japan ceases to exist, swallowed into the rising Chinese empire while Indonesia invades Australia. The progressive celebration of singleness and childlessness – promoted by those who wish to cram people into ever smaller spaces — has consequences that will turn ever manifest in the future.

It’s hard to know what was intended by that “celebration” line. Subjectively, it reminded me of workplace issues where parents exercise more flexible schedules and are out of the office more than non-parents (“childless” kinda sounds like “barren,” no?). It can create a bit of unfairness feelings. It’s similar to non-parents maybe being expected to work late, whereas parents can leave timely because they have to pick-up kids.

There’s definitely an online contingent that pushes the childless lifestyle and like’s to attack those that have children, but I don’t think they are representative of the Progressive movement as a whole. I’ve heard people complain that people with kids get to leave earlier, etc. That’s probably true to an extent, but those people also have the option of leaving early for their own medical appoints, sick parents, etc.

Five years after the housing recovery began, 5.9 million borrowers still owe more on their mortgages than their homes are worth.

The so-called negative equity rate in the U.S. is falling, now at 12 percent of all mortgaged homeowners, according to Zillow, down from more than 14 percent a year ago and more than 30 percent at the worst of the crisis. The numbers, however, are still well above normal levels and equally spread across urban and suburban communities.

It would seem like negative equity should have evaporated by now, given how fast home prices have been rising. Several metropolitan markets have even reached new record highs in median home prices, but it hasn’t been enough to lift all borrowers.

“At its worst, negative equity touched all kinds of homeowners in all kinds of markets,” said Zillow’s chief economist, Svenja Gudell. “The type of community a given home was in — urban or suburban — mattered little. Fast-forward a few years, and the relative vibrancy of a given community and how it has performed over the past few years, and not necessarily its location in the city or suburbs, matters a great deal.”

Markets in the West, like San Francisco, Portland, Oregon, Denver and Dallas, have the least borrowers in a negative equity position. That is due to strong employment and competitive housing markets. These markets have also seen the biggest price gains over the past few years.

BOTTOM LINE: Assuming a borrower gets the average 30-year conforming fixed rate on a $417,000 loan, last year’s rate of 3.93 percent and payment of $1,974 is $118 more than this week’s payment of $1,856.

WHAT I SEE: (From rate sheets hitting my desk that are not part of Freddie Mac’s survey.) Locally, well-qualified borrowers can get the following conventional fixed rate loans with zero cost: 15-year at 2.875 percent; 20-year at 3.375 percent; 25- and 30-year at 3.5 percent; high balance ($417,001 to $625,500 loan amounts): 15-year fixed at 3.125 percent; 30-year fixed at 3.75 percent.

Realtyshares is a company that has taken the real estate crowdfunding industry by storm. Clearly the number one competitor in their sector, they owe a large part of that climb up the ladder to their success in California.

Looking to revamp the archaic industry of real estate investing through the use of technology, RealtyShares has solidified itself as a leader in the burgeoning real estate crowdfunding arena. California has been one of the most active states for the company that has its roots firmly planted in the Bay Area.

California borrowers and sponsors have raised more than $53 million across 90 properties in the Golden State. These projects range from residential fix-and-flips, to multi-family and commercial value-add investment opportunities, providing the RealtyShares network of more than 20,000 investors with a diverse set of deals. “Good buys have been hard to find considering the substantial demand for California real estate,” said Brian Esquivel, Director of Equity Investments. “By leveraging the crowd, we still have the ability to vet attractive investment opportunities across the state as sponsors look for alternative ways to fund their projects.”

All of these crowdfunding sites have started during a very strong up-cycle in real estate, including historically low cap rates in commercial. It will be interesting to see which of these companies survive during the next downturn. I’m interested in crowdfunding, but would be hesitant to invest in something with less than one full real estate cycle of performance data.

Despite a boom in urban living and rapid run-ups in home prices in many cities, urban homeowners with mortgages are struggling more in the recovery than their suburban counterparts, according to new research.

Nationally, 14% of homeowners in urban areas owed more on their mortgages than their homes were worth in the second quarter, slightly more than 11% in suburban areas, according to a report released on Thursday by real-estate researcher Zillow.

Even though home prices are now just 2% away from their prior peak, much of that recovery has been concentrated in markets with rapid job growth, from San Francisco to Denver, while in other places a large share of homeowners remain years away from seeing their home values recover.

While overall urban areas have fared well in the recovery due to an influx of young, educated people attracted to urban living, the higher rate of so-called negative equity in urban areas is driven by a handful of poorer cities that have been deeply devastated by the housing bust and long-term economic decline.

In Detroit, 23% of urban homeowners with mortgages are underwater, compared with 12% of those in the suburbs, according to Zillow. In Cleveland, 27% of urban homeowners owe more than the value of their homes, compared with 14% in the suburbs.

The persistence of high rates of negative equity in those places despite several years of rapid home-price growth nationally underscores that they are likely many years away from returning to normal. Researchers estimate that the normal share of underwater homeowners is around 5%.

“Honestly, I think especially for a place like Detroit, it’s going to take a whole bunch of time,” said Svenja Gudell, Zillow’s chief economist. “There is no quick fix.”

They should chart Clinton’s foreign donations by Country and see what kind of links/connections they had before they forked over tens of millions, also include dates in reference to her Sec of State service.

That is a thorny question I’ve never heard addressed. As president, the interests of the country must come before his personal business interests, but how is that accomplished. If he pursues a policy that benefits his buinesses, is he doing so because it’s best for the country or best for himself? We’ve never had a candidate with such extensive business interests to face this problem before.

I had to laugh when seeing the NY Times characterize his business interests as a “maze” and “opaque”. It’s only opaque and difficult to understand because his businesses are private entities that aren’t required to submit forms for public disclosure. Anybody with access to this information and a business background would have no trouble understanding it.

Hank Paulson sold his Goldman shares when becoming Treasury Secretary to avoid conflicts. This was a very wise decision and proved incredibly fortunate and timely, occurring in 2006 before the Great Recession.

I remember when Lloyd Blankfein of Goldman Sachs said that they were “doing the Lords’ work” and I thought how come Jesus made so little money and Lloyd and his friends made so much? Are they doing the Lord’s work better than Jesus did? That’s a pretty audacious claim, even for someone with a Wall Street-sized ego.

Donald’s Trump “university” isn’t the only school of higher learning in hot water these days. It’s joined by the “fix and flip” seminars sold by Armando Montelongo, the onetime star of the A&E series “Flip This House.”

In a federal civil suit filed in San Francisco this spring, some 160 students claim they paid thousands to attend Montelongo’s classes that would supposedly teach them how to buy run-down houses, fix them up and sell them for a quick profit. But, the suit alleges, the courses served only to enrich Montelongo.

According to Montelongo’s hometown newspaper, the San Antonio Express-News, “students typically paid $1,500 for an introductory course, where they were recruited for ‘bus tour packages’ that cost up to $54,000. … Classes on ‘asset protection’ cost $27,000 more. ‘Market domination,’ cash flow programs and master mentor classes cost up to an additional $55,000.”

The suit maintains that Montelongo and his companies have “destroyed livelihoods, wrecked marriages, driven students into clinical depression and even resulted in suicide.”

In an email to the Express-News, Montelongo’s attorneys essentially dismissed the suit, saying it was filed by a bunch of lazy students who couldn’t follow the pitchman’s instructions.

Of the “more than 1.5 million people” — hold that thought — who have taken the classes, the email said, the “small group” of plaintiffs “have decided continuous hard work is not for them. Now, they have chosen to try and make money the easy way by clogging up our legal system with a frivolous lawsuit.”

The suit accuses Montelongo and his companies of violating the Racketeering Influenced and Corrupt Organizations (RICO) Act by committing wire fraud and conspiring to deceive investors over a number of years. It estimates actual damages at $4 million, but triple damages can be sought under the RICO law.

Back to that “1.5 million people” figure: yikes. That’s a lot of customers. No wonder Forbes once estimated Montelongo’s net worth at $200 million.

Had the disgruntled students — and possibly many others who have not come forward, perhaps too embarrassed to admit they might have been fleeced — done a little sleuthing, they might have saved themselves a lot of time and money. An online guide called “The Top 20 Real Estate Gurus: The Good, Bad and Ugly” gives him just one out of five stars, and the Amazon reviews of his paperback, “Flip and Grow Rich,” are less than scintillating. “The ‘secret’ revealed in this book is that you need to sign up for Armando’s seminar,” said one reviewer. “Don’t waste your money.”

An 2013 article in Forbes describes him as a “house-flipping huckster” who offers “long weekends of questionable advice, raucous showmanship and tours of foreclosed homes in some of America’s poorest sections.” Writer Abram Brown asked him to produce alums of his seminars who made millions by using his methods, but he either wouldn’t or couldn’t.

Whether the suit against Montelongo will prove successful is hard to say. But he’s probably right about one thing: Millions of people have attended his and other so-called gurus’ seminars.

As an owner of rental houses, I see the handiwork of these “instructors” almost weekly.

In just the last few days, I have received four letters and postcards asking me if I want to sell a property. Some are typed, some are made to look handwritten (while still being mass-printed), but they all say essentially the same thing. They promise a quick, clean, “as-is” cash sale — no sales commission or extra fees. They’ll even pay all closing costs. What they don’t say is that they only want to give me half what the place is worth on the open market.

What this tactic says to me is that either a lot of people have taken the same class, or a lot of these get-rich-quick guys are teaching the same thing.

The advice here is to stay clear of anyone who promises you’ll earn a fortune by following their investing techniques. If it’s so easy, why are they peddling seminars, books and videos instead of flipping houses full-time themselves?

I think there are two sides to the coin here. No doubt this guy is probably shady as hell. However I doubt what this guy did is any different from other gurus out there. People pay all this money and expect to get something in return. When they dont, they get pissed and sue. The problem is, they probably didnt put much time into it. Ive seen way too many people just dabble in real estate thinking throwing money into it will reap them rewards. It takes more time and effort than money in real estate. Just thats my experience and my opinions however.

It’s easy to spot these scumbags, when their infomercials start with “no money down”! Or “Use other’s peoples money”!

I mean seriously, if they made so much money, why share their secrets?

Our local team down here “Flip or Flop”, are good people but more than anything they run a business and they are starting to branch out a lot as well. They have seminars around LA County. I would hate to see them on the news.

The thing is there really are no secrets. Everything is available for free or very cheap through online forums and assorted books. Most of the people attending these seminars are not interested in learning a business, instead they are getting suckered in by the dream of instant riches for very little work. It’s the lottery mentality and they let their dreams rather than common sense prevail.

They are cut from the same cloth. They give free or cheap seminars that are extended sales pitches for their $25,000 training. They make everyone sign an onerous non-disclosure form, and they sue or threaten to sue anyone who says anything negative about them.

There is a good NIMBY situation going on here in Corona. There is an old abandoned golf course that runs through the middle of town. Build houses on it they say. Unfortunately, the nearby residents of the area are trying to fight that due to the negative impact in traffic (I can’t argue with them).

Mind you it’s currently run down and everything is dead. So basically the choice is to build houses on it and revitalize the property or leave it alone and it will still be a rundown eye sore, bastion for the homeless. Probably 0% chance that it would ever turn into usable green space or park for the city.

No. I thought making El Toro a huge park was a huge mistake. I don’t know if an airport was the best use, as it would have increased commerce without providing much housing, but it would have been a better use than the great weedpatch and rubble pile.

It’s not a golf course any longer. It runs through Corona bordered by Serfas Club and Paseo Grande area (south of the 91). It’s essentially dead space right now. Hence the big debate about it. I’m sure more houses will win out in the end…because you know…tax dollars.

THE most dramatic moment of the global financial crisis of the late 2000s was the collapse of Lehman Brothers on September 15th 2008. The point at which the drama became inevitable, though—the crossroads on the way to Thebes—came two years earlier, in the summer of 2006. That August house prices in America, which had been rising almost without interruption for as long as anyone could remember, began to fall—a fall that went on for 31 months (see chart 1). In early 2007 mortgage defaults spiked and a mounting panic gripped Wall Street. The money markets dried up as banks became too scared to lend to each other. The lenders with the largest losses and smallest capital buffers began to topple. Thebes fell to the plague.

Ten years on, and America’s banks have been remade to withstand such disasters. When Jamie Dimon, the boss of JPMorgan Chase, talks of its “fortress” balance-sheet, he has a point. The banking industry’s core capital is now $1.2 trillion, more than double its pre-crisis level. In order to grind out enough profits to satisfy their shareholders, banks have slashed costs and increased prices; their return on equity has edged back towards 10%. America’s lenders are still widely despised, but they are now in reasonable shape: highly capitalised, fairly profitable, in private hands and subject to market discipline.

The trouble is that, in America, the banks are only part of the picture. There is a huge, parallel structure that exists outside the banks and which creates almost as much credit as they do: the mortgage system. In stark contrast to the banks it is very badly capitalised (see chart 2). It is also barely profitable, largely nationalised and subject to administrative control.

That matters. At $26 trillion America’s housing stock is the largest asset class in the world, worth a little more than the country’s stockmarket. America’s mortgage-finance system, with $11 trillion of debt, is probably the biggest concentration of financial risk to be found anywhere. It is still closely linked to the global financial system, with $1 trillion of mortgage debt owned abroad. It has not gone unreformed in the ten years since it set off the most severe recession of modern times. But it remains fundamentally flawed.

The strange path the mortgage machine has taken has implications for ordinary people, as well as for financiers. The supply of mortgages in America has an air of distinctly socialist command-and-control about it. Some 65-80% of all new home loans are repackaged by organs of the state. The structure of these loans, their volume and the risks they entail are controlled not by markets but by administrative fiat.

No one is keen to make transparent the subsidies and dangers involved, the risks of which are in effect borne by taxpayers. But an analysis by The Economist suggests that the subsidy for housing debt is running at about $150 billion a year, or roughly 1% of GDP. A crisis as bad as last time would cost taxpayers 2-4% of GDP, not far off the bail-out of the banks in 2008-12.

America’s housing system has always been unusual. In most countries banks minimise their risk by offering short-term or floating-rate mortgages. American borrowers get a better deal: cheap 30-year fixed-rate mortgages that can be repaid early free. These generous terms are made possible by the support of a housing-finance machine that funnels cheap credit to homeowners and, in doing so, takes on the risk, thereby shielding both the borrowers and the investors.

For decades lightly regulated thrifts did most of this lending. But in the 1980s they blew up due to a mixture of risky lending, inadequate capital and bad bets on interest rates. Between 1986 and 1996, over 1,000 thrifts were bailed out at a cost to taxpayers of about 3% of one year’s GDP.

The vacuum left by the thrifts was filled by the new technology of securitisation, which seemed, for a while, to make the risk vanish altogether. There are several steps. Mortgages are originated, or agreed, with millions of homeowners. The loans thus underwritten are then spruced up to look more attractive or realise some profits; for example sometimes insurance may be taken out against defaults, or the rights to “service” loans (collect interest payments) sold off. Next the loans are guaranteed and securitised. The bundles of bonds thus produced are then flogged to investors. After all this, derivatives contracts are created whose value is linked to these bonds.

The machine blew up in 2006-10 for a host of reasons, the most important of which was wild and sometimes fraudulent underwriting. There was a run on mortgage bonds and on the firms that issued or owned them. There have since been three big changes.

The trouble with Gosplan
First, banks have partially withdrawn from the mortgage game after facing swathes of new rules and $110 billion of fines for misconduct. They still own mortgage-backed bonds and they still make home loans to wealthy folk, which they keep on their balance-sheets. But with the exception of Wells Fargo they are less keen on writing riskier loans in their branches and feeding them to securitisers. New, independent firms like Quicken Loans and Freedom Mortgage have filled the gap. They originate roughly half of all new mortgages.

The second big change is that the government’s improvised rescue of the system in 2008-12 has left it with a much bigger role (see chart 3). It is the majority shareholder in Freddie Mac and Fannie Mae, mortgage companies that were previously privately run (though with an implicit guarantee). They are now in “conservatorship”, a type of notionally temporary nationalisation that shows few signs of ending. Other private securitisers have withdrawn or gone bust. This means that the securitisation of loans, most of which used to be in the private sector, is now almost entirely state-run. Along with Fannie and Freddie, the other main players are the Veterans Affairs department (VA), the Federal Housing Administration (FHA) and Ginnie Mae, which helps the FHA and VA package loans into bonds and sell them.

In all, these five bodies own or have guaranteed $6.4 trillion of loans: a book of exposure three times larger than Mr Dimon’s balance-sheet. The FHA, an agency tasked with promoting home ownership, has tripled its guarantee book since the crisis. The mortgage bonds into which these entities bundle their loans are perceived by investors to be almost as safe as Treasuries; though they charge a fee for this protection, it is far lower than that which private companies that do not benefit from the backing of the state would have to charge if they were taking on the same risks. Thus they face no competition.

The last big change is the withering of the derivatives superstructure. The baroque instruments of the 2003-07 bubble, such as CDOs, CLOs and swaps on the ABX Index, have been stripped back after huge losses: trading activity has fallen by 90%. The mortgage machine is safer as a result. But even shorn of this amplifying mechanism, the machine is still connected to the broader world of global finance. American banks own 23% of all government mortgage bonds.

American officials who served during the crisis tell war stories about trying to persuade their counterparts in China and elsewhere not to dump all their mortgage bonds. As a result of their efforts foreign central banks, private banks and financial firms still hold 15% of all mortgage bonds; Barclays’ mortgage-bond holdings are worth 22% of the bank’s core capital. The rest are mainly owned by domestic investment funds and the Federal Reserve which, due to its asset-purchasing scheme, holds $1.8 trillion of government mortgage bonds, or 27% of the total.

This new credit machine has plenty of flaws. Almost everyone in the business worries that regulation of the new mortgage originators which funnel loans to the government-guarantee firms is too loose, for example; supervisors are looking at tightening up. But the biggest issue is the danger that sits with the state-run securitisers that magically transform risky mortgages into risk-free bonds. With a dearth of reliable market signals and a diminished profit motive, the risk appetite of the mortgage system is now entirely controlled by administrative fiat. There are at least 10,000 relevant pages of federal laws, regulatory orders and rule books.

These are meant to prevent another blow-up by screening out undesirable loans before securitisation. They stipulate the profile of the borrower (a debt-servicing-to-income ratio of more than 43% is a poor lookout) and, indeed, the dimensions of the house (if prefabricated, it must be at least 12 feet, or 3.6 metres, across). They define the documentation required. They specify the design of mortgages: balloon payments (whereby repayment of the principal is pushed back to the end of the loan period) are a no-no, as are some fee structures. They impose rules on counterparties: mortgage insurers, for example, must have over $400m of assets at hand. Although there are no government quotas for the volume of new loans there are soft targets.

Like water through cracks, risk still finds a way in. Federal law is silent on loan-to-value limits for borrowers, so this is one area where risky lending is booming, with a fifth of all loans granted since 2012 having LTV ratios of 95%, meaning homeowners are underwater if house prices fall by more than 5%. Most of these sit with the FHA. One big bank admits that it is selling at face value high-risk loans to the government that it expects will make a 10-15% loss due to homeowners defaulting.

My indecision is final
And all such rules are vulnerable to political pressure. Home-ownership rates have dropped to about 63% from a peak of 69% (see chart 4); many housing experts talk of an affordability crisis among the young and minorities. With Congress gridlocked and likely to remain so after the election, the mortgage machine is a largely off-balance-sheet way to funnel money to ordinary Americans, most of whom still want to own homes. Just as underwriting standards in the private sector gradually loosened over time before 2007, there are gentle signs of loosening evident today, too—rules on down-payments, for example, have been relaxed. Not yet frightening; but it never is, to begin with.

All the new rules are silent on the mortgage system’s purpose. One potential justification is simply to facilitate a liquid mortgage-bond market. By acting as a common guarantor, the state can ensure that mortgage bonds are homogenous and easy to trade ($220 billion-worth change hands every day). Another is to subsidise home loans for a broader political or social purpose. In the absence of a grand design or clear political direction, the mortgage machine has assumed both roles.

One response to the new mortgage system is to leave it be. After all, the previous approach, in which private securitisers played a bigger role, was a disaster. Household debt is relatively restrained at the moment; measured by debt-service-to-income ratios it is 10% below the long-term average. Based on the post-war experience, housing-debt crises come only every 25 years or so; it is not yet time to worry about another one.

Leaving aside its fundamental irresponsibility, a course of inaction carries hard-to-quantify costs in the form of subsidies for borrowers. The securitisation industry believes there are reasons for not holding it to the same standard as the banks. But imagine that it were: that it had to carry the same level of capital as banks do and to make an adequate (10%) post-tax profit on that capital. The higher costs entailed give a sense of the scale of the current distortion. On this basis The Economist calculates the subsidy on mortgages to be running at $150 billion a year, 1% of GDP. (This estimate includes the impact of the Fed’s bond-buying on interest rates and the cost of tax breaks on mortgage-interest payments.)

And the status quo also means that, in the event of another crash, taxpayers would be landed with a big bill. How big? Consider a spectrum of scenarios. At one end, the cumulative mortgage-system losses are 10%, the same as the actual losses in 2006-14 according to estimates by Mark Zandi of Moody’s Analytics. At the other, cumulative losses on all mortgages are assumed to be 4.4%—the level the Fed used in its stress tests of the banks in May 2016. Adjusting for the pockets of capital in the system, and the profits made by some parts of it, both of which can help absorb losses, this means that the total loss for taxpayers if another crisis strikes would be $300 billion-600 billion, or 2-4% of GDP. Most of this would fall on Fannie, Freddie and the FHA, which would need to draw money from the government to pay out on the insurance claims made by investors.

Such a bill would hardly bankrupt America. But it would enrage it again. It is similar in size to the $700 billion TARP bail-out that Congress reluctantly passed in 2008. Lawmakers might be unwilling to pay for a repeat performance, especially with some of the benefit going abroad—and the mere possibility of their not stumping up would set the world’s financial markets a-jitter. If Congress signed off, a populist president might still be able to scupper the deal; the credit line through which Fannie and Freddie would be paid is governed by a contract between the Treasury and their regulator that comes under the executive. The catastrophic impact that a mortgage-bond default would have on the markets would almost certainly serve to ensure that the politicians did, indeed, act. But the capacity of American politics to disregard what used to seem almost certain is on the up these days.

How to waste a crisis
There is an alternative approach: force the mortgage machine to follow the same path the banks have. It would have to recapitalise and raise its fees enough to offer an acceptable profit on that capital. The subsidy would fall. Administrative controls could be eased. The risk of loss could be passed into private hands, either by privatising the mortgage-securitisation firms or by allowing them to shrink, with private banks and insurers now able to compete on a level playing field. Using the same approach as the Fed’s bank-stress tests, the system would need about $400 billion of capital. The cost of American mortgages would rise by about one percentage point.

There are various proposals for reducing the government’s role in the system; the White House floated several in 2013, and there is a range of reform bills floating around Congress, the best of which is known as Corker-Warner. But no one is in a hurry to pass reforms that would result in higher mortgage rates at a time when the middle class is struggling. A lot of policy discussions obfuscate the basic issues, assuming either that mortgages are now much safer than they were in the past or that the mortgage-guarantee firms can be safer than the banks even though not subject to the same stringent capital rules.

The government has pragmatic reasons to procrastinate. The coupons it gets on money loaned to Fannie and Freddie count as income but their debt doesn’t end up on its books; that provides a nice fillip for the accounts. The status quo also lets it avoid confronting a noisy group of hedge funds taking legal action over the treatment of Fannie’s and Freddie’s shareholders in the bail-out. If the government were to recapitalise or restructure the mortgage firms, it would probably need to reach a settlement with the hedge funds or defeat them.

To be fair, some parts of the mortgage system are trying to find ways to push risks on to the private sector. Fannie and Freddie have written new “risk sharing” deals that take a slice of the risk on about $850 billion of bonds, and package it into securities that are sold to investors or swap contracts with reinsurance firms. But even if these measures did not look a little too like some of the opaque instruments that blew up in 2007-08 to be entirely comforting, they would be no substitute for proper reform.

So the trigger for the most recent crisis remains the part of the global financial system that has been least reformed. Mortgages are still the place where many of America’s deepest problems meet—an addiction to debt, the use of hidden subsidies to mitigate inequality, and political gridlock. In the land of the free, where home ownership is a national dream, borrowing to buy a house is a government business for which taxpayers are on the hook.

America’s housing system has always been unusual. In most countries banks minimise their risk by offering short-term or floating-rate mortgages. American borrowers get a better deal: cheap 30-year fixed-rate mortgages that can be repaid early free. These generous terms are made possible by the support of a housing-finance machine that funnels cheap credit to homeowners and, in doing so, takes on the risk, thereby shielding both the borrowers and the investors.

This is not true. This is repeated often by bankers who would prefer to see customers assume interest-rate risk, but the 30-year fixed-rate mortgage is not unusual, and it has only been directly subsidized since 2008 when the Treasury took over the GSEs.

The article says we “Accidentally” nationalized our housing finance market, but it was an “accident” precipitated by the housing bust. If we hadn’t nationalized the GSEs, the bust would have been worse.

The cartoon above is one of my favorites because it points to a simple truth that Nimbys conveniently ignore: The neighborhood they live in was better before their house was built and they moved in.

I don’t think this applies to everybody. My family has been in OC since it was literally orange groves and nobody was protesting the development of farmland into housing developments back then. The existing residents (farmers) were happy to sell and the buyers were happy to buy. It was a win/win. Nowadays, that can’t be said because one party is winning (builders) at the expense of the existing residents.

The neighborhood I live in was one that replaced farmland in the 1950’s, so it’s not clear that the prior use was better. The newer neighborhoods being built these days consist of high-density apartments that are replacing areas of cultural significance in many cases. Look at the demise of Wild Rivers and the coming demise of Irvine Meadows. These are two cultural landmarks being replaced by unimaginative, beige, high-density apartment buildings because it benefits the pocketbooks of builders, not the existing community in any way.

[…] California legislators found the political will to actually solve the housing crisis in California rather than giving in to the Nimbys. If Governor Brown formed a committee and charged them with crafting a policy to bring housing […]